David Owens Overstates the Rebound Effect’s Relevance

Owen’s sexy hypothesis is that the Prius actually contributes to climate change! How could this happen? The Prius has such a high MPG that it effective reduces the price per mile of driving. If demand is really elastic, then people could respond to this incentive by driving so much more that their total gasoline consumption increases relative to the amount they would have consumed had they owned a Hummer! This is the “rebound effect”. Energy efficient products lead us to use them more and thus “backfire”.

As an economist, I agree with this logic but as an empiricist I don’t believe that the behavioral response could be this large because of the time component of driving the car. The impressive part of the blog post is that the authors quote actual data collected by Ken Gillingham of Yale. Using California data from registered vehicles, he documents that Prius drivers drive the same amount as other drivers. So, Owens is wrong — Long live the Prius!

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The post says that “[w]e expect that an average Prius owner will spend the extra money the same way they spend the rest of their money. In the worst case scenario, then, where 8 percent of a Prius driver’s $1500 fuel savings is spent on energy $120 ($1500*8%) is re-injected into the energy economy.”

Does the permanent income hypothesis (on which Owen’s theory seems to be based) give reason to think even this 8% is an overestimate? I.e., would the high up-front expenditure on the Prius as compared to a traditional alternative mean that you save more during the lifetime of the car in order to keep your total lifetime consumption constant?

If there’s ever a situation in which the permanent income assumption makes sense, isn’t it here? When you’re decide whether to buy a hybrid or a traditional car, you consciously compare the possibility of a a large up-front investment and low operating costs (the Prius) against a smaller up-front investment and higher operating costs (traditional car). If you pick the hybrid, you’re deciding to make the up front investment, but you are also likely deciding to offset this higher cost by squirreling away the money you’re not going to be spending on fuel. In fact, if we’re going to get all free-market with our assumptions (and that’s the game Owen is playing, right?), then market competition will ensure that the total cost of ownership of the Prius is exactly equal to non-hybrid alternative. If so, 100% of the $1500 fuel savings should be saved, and $0 spent on energy.

And even assuming that the Prius owner does NOT save $1500, there is a question about causation. The increment to total energy consumption that results from buying a more expensive green car AND continuing consumption unabated shouldn’t be traced to the consumer’s decision to buy the green car, but to the consumer’s decision to consume more overall, perhaps because the consumer feels wealthier than she did last year.

More generally, I guess my suggestion is that Owen’s hypothesis that investment in efficiency increases consumption of other energy-intensive goods can only be true when the efficiency investment in fact increases the consumer’s net income. That’s not the case for the Prius and for at least some of the other green luxury goods he likes to criticize. Ironically, its the CHEAP green goods that he should be most concerned about.

The post says that “[w]e expect that an average Prius owner will spend the extra money the same way they spend the rest of their money. In the worst case scenario, then, where 8 percent of a Prius driver’s $1500 fuel savings is spent on energy $120 ($1500*8%) is re-injected into the energy economy.”

Does the permanent income hypothesis (on which Owen’s theory seems to be based) give reason to think even this 8% is an overestimate? I.e., would the high up-front expenditure on the Prius as compared to a traditional alternative mean that you save more during the lifetime of the car in order to keep your total lifetime consumption constant?

If there’s ever a situation in which the permanent income assumption makes sense, isn’t it here? When you’re decide whether to buy a hybrid or a traditional car, you consciously compare the possibility of a a large up-front investment and low operating costs (the Prius) against a smaller up-front investment and higher operating costs (traditional car). If you pick the hybrid, you’re deciding to make the up front investment, but you are also likely deciding to offset this higher cost by squirreling away the money you’re not going to be spending on fuel. In fact, if we’re going to get all free-market with our assumptions (and that’s the game Owen is playing, right?), then market competition will ensure that the total cost of ownership of the Prius is exactly equal to non-hybrid alternative. If so, 100% of the $1500 fuel savings should be saved, and $0 spent on energy.

And even assuming that the Prius owner does NOT save $1500, there is a question about causation. The increment to total energy consumption that results from buying a more expensive green car AND continuing consumption unabated shouldn’t be traced to the consumer’s decision to buy the green car, but to the consumer’s decision to consume more overall, perhaps because the consumer feels wealthier than she did last year.

More generally, I guess my suggestion is that Owen’s hypothesis that investment in efficiency increases consumption of other energy-intensive goods can only be true when the efficiency investment in fact increases the consumer’s net income. That’s not the case for the Prius and for at least some of the other green luxury goods he likes to criticize. Ironically, its the CHEAP green goods that he should be most concerned about.